SUBJECT: INTERNATIONAL FINANCIAL MANAGEMENT

PAPER CODE: MS 221

1. Which of the following is a legitimate reason for international investment?

(a) Dividends from a foreign subsidiary are tax exempt in the United States.

(b) Most governments do not tax foreign corporations.

(c) There are possible benefits from international diversification.

(d) International investments have less political risk than domestic investments.

2. By definition, currency appreciation occurs when

(a) the value of all currencies fall relative to gold.

(b) the value of all currencies rise relative to gold.

(c) the value of one currency rises relative to another currency.

(d) the value of one currency falls relative to another currency.

3. Theory which considers change in exchange rate with fluctuations in inflation rates is

classified as

(a) liquidated power parity

(b) purchasing power parity

(c) selling power parity

(d) volatile power parity

4. If purchasing power parity were to hold even in the short run, then:

(a) real exchange rates should tend to decrease over time.

(b) quoted nominal exchange rates should be stable over time.

(c) real exchange rates should tend to increase over time.

(d) real exchange rates should be stable over time.

5. Given a home country and a foreign country, purchasing power parity suggests that:

(a) the home currency will appreciate if the current home inflation rate exceeds the

current foreign inflation rate

(b) the home currency will depreciate if the current home interest rate exceeds the

current foreign interest rate

(c) the home currency will depreciate if the current home inflation rate exceeds the

current foreign inflation rate

(d) the home currency will depreciate if the current home inflation rate exceeds the

current foreign interest rate

6. Interest Rate Parity (IRP) implies that:

(a) Interest rates should change by an equal amount but in the opposite direction to the

difference in inflation rates between two countries

(b) The difference in interest rates in different currencies for securities of similar risk

and maturity should be consistent with the forward rate discount or premium for

the foreign currency

(c) The interest rates between two countries start in equilibrium, any change in the

differential rate of inflation between the two countries tends to be offset over the

longterm by an equal but opposite change in the spot exchange rate

(d) In the long run real interest rate between two countries will be equal

(e) Nominal interest rates in each country are equal to the required real rate plus

compensation for expected inflation

7. In equilibrium position, spread between foreign and domestic rate of interest must be equal

to spread of

(a) domestic rates

(b) forward and spot exchange rates

(c) forward rate

(d) spot rates

8. Rule which states that similar set of goods and services produced in various countries

should have equal price is classified as

(a) law of similar mortgage rate

(b) law of one type manufacturing

(c) law of similar labor rules

(d) law of one price

9. Example of derivative securities includes

(a) swap contract

(b) option contract

(c) futures contract

(d) all of above

10. Authority which intervenes directly or indirectly in foreign exchange markets by altering

interest rates is considered as

(a) central government

(b) centralized stocks

(c) central corporations

(d) centralized instruments

11. The forward market is especially well-suited to offer hedging protection against

(a) translation risk exposure.

(b) transactions risk exposure.

(c) political risk exposure.

(d) taxation.

12. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange

market. This implies that most likely

(a) this currency has low exchange-rate risk.

(b) this currency is gaining strength in relation to the dollar.

(c) interest rates are higher in Japan than in the United States.

(d) interest rates are declining in Japan.

13. Hedging is used by companies to:

(a) Decrease the variability of tax paid

(b) Decrease the spread between spot and forward market quotes

(c) Increase the variability of expected cash flows

(d) Decrease the variability of expected cash flows

(e) Increase the variability of tax paid

14. Which of the following is true of foreign exchange markets?

(a) The futures market is mainly used by hedgers while the forward market is mainly

used for speculating.

(b) The futures market and the forward market are mainly used for hedging.

(c) The futures market is mainly used by speculators while the forward market is

mainly used for hedging.

(d) The futures market and the forward market are mainly used for speculating.

15. Exchange rates

(a) are always fixed

(b) fluctuate to equate the quantity of foreign exchange demanded with the quantity

supplied

(c) fluctuate to equate imports and exports

(d) fluctuate to equate rates of interest in various countries

16. An arbitrageur in foreign exchange is a person who

(a) earns illegal profit by manipulating foreign exchange

(b) causes differences in exchange rates in different geographic markets

(c) simultaneously buys large amounts of a currency in one market and sell it in another

market

(d) None of the above

17. A speculator in foreign exchange is a person who

(a) buys foreign currency, hoping to profit by selling it a a higher exchange rate at some

later date

(b) earns illegal profit by manipulation foreign exchange

(c) causes differences in exchange rates in different geographic markets

(d) None of the above

18. A floating exchange rate

(a) is determined by the national governments involved

(b) remains extremely stable over long periods of time

(c) is determined by the actions of central banks

(d) is allowed to vary according to market forces

19. The current system of international finance is a

(a) gold standard

(b) fixed exchange rate system

(c) floating exchange rate system

(d) managed float exchange rate system

20. A simultaneous purchase and sale of foreign exchange for two different dates is called

(a) currency devalue

(b) currency swap

(c) currency valuation

(d) currency exchange

21. Investment can be defined.

(a) Person’s dedication to purchasing a house or flat

(b) Use of capital on assets to receive returns

(c) Usage of money on a production process of products and services

(d) Net additions made to the nation’s capital stocks

22. The concept of Financial management is.

(a) Profit maximization

(b) All features of obtaining and using financial resources for company operations
(c) Organization of funds

(d) Effective Management of every company

23. What is the primary goal of financial management?

(a) To minimise the risk

(b) To maximise the owner’s wealth

(c) To maximise the return

(d) To raise profit

24. GST is a consumption of goods and service tax based on.

(a) Development

(b) Dividend

(c) Destiny

(d) Duration

(e) Destination

25. The finance manager is accountable for.

(a) Earning capital assets of the company

(b) Effective management of a fund

(c) Arrangement of financial resources

(d) Proper utilisation of funds

26. The market value of a share is responsible for.

(a) The investment market

(b) The government

(c) Shareholders

(d) The respective companies

27. The capital budget is associated with.

(a) Long terms and short terms assets

(b) Fixed assets

(c) Long terms assets

(d) Short term assets

28. CAPM stands for.

(a) Capital asset pricing model.

(b) Capital amount printing model.

(c) Capital amount pricing model.

(d) Capital asset printing model.

29. What does financial leverage measure?

(a) No change with EBIT and EPS

(b) The sensibility of EBIT with % change with respect to output

(c) The sensibility of EPS with % change in the EBIT level

(d) % variation in the level of production

30. From the below-mentioned items which are financial assets?

(a) Machines

(b) Bonds

(c) Stocks

(d) B and C

31. Trade between two countries can be useful if cost ratios of goods are:

(a) Undetermined

(b) Decreasing

(c) Equal

(d) Different

32. The term Euro Currency market refers to

(a) The international foreign exchange market

(b) The market where the borrowing and lending of currencies take place outside the

country of issue

(c) The countries which have adopted Euro as their currency

(d) The market in which Euro is exchanged for other currencies

33. Which of the following theories suggests that firms seek to penetrate new markets over

time?

(a) Imperfect Market Theory

(b) Product cycle theory

(c) Theory of Comparative Advantage

(d) None of the above

34. Dumping refers to:

(a) Reducing tariffs

(b) Sale of goods abroad at low a price, below their cost and price in home market

(c) Buying goods at low prices abroad and selling at higher prices locally

(d) Expensive goods selling for low prices

35. International trade and domestic trade differ because of:

(a) Different government policies

(b) Immobility of factors

(c) Trade restrictions

(d) All of the above

36. The margin for a currency future should be maintained with the clearing house by

(a) The seller

(b) The buyer

(c) Either the buyer or the seller as per the agreement between them

(d) Both the buyer and the seller

37. The following statement with respect to currency option is wrong

(a) Foreign currency- Rupee option is available in India

(b) An American option can be executed on any day during its currency

(c) Put option gives the buyer the right to sell the foreign currency

(d) Call option will be used by exporters

38. Govt. policy about exports and imports is called:

(a) Commercial policy

(b) Fiscal policy

(c) Monetary policy

(d) Finance policy

39. Which of the following is international trade:

(a) Trade between countries

(b) Trade between regions

(c) Trade between provinces

(d) Both (b) and (c)

40. Market in which currencies buy and sell and their prices settle on is called the

(a) International bond market

(b) International capital market

(c) Foreign exchange market

(d) Eurocurrency market

41. Purchasing goods from a foreign country is called

(a) Import

(b) Entrepot

(c) Export
(d) Re-Export

42. Goods imported for the purpose of export is known as

(a) Home trade

(b) Foreign trade

(c) Entrepot

(d) Trade

43. Agents are appointed by?

(a) Manufacturer

(b) Wholesaler

(c) Retailer

(d) Principal

44. Who among these can check the price fluctuations in the market by holding back the

goods when prices fall and releasing the goods when prices rise

(a) Agent

(b) Mercantile agent

(c) Wholesaler

(d) Retailer

45. These are agents whose function is to bring the buyer and the seller into contact.

(a) Commission agent

(b) Selling agent

(c) Broker

(d) Stockist

46. Who among the following appoints the agent

(a) Principal

(b) Retailer

(c) Manufacturer

(d) Wholesaler

47. Which among the following is not concerned with Chambers of Commerce & Industry

(a) CII

(b) FICCI

(c) ICICI

(d) ASSOCHAM

48. One example of Small scale Fixed retailers among these is

(a) Pedlars

(b) General stores

(c) Hawkers

(d) Cheap Jacks

49. This retail business acts as a universal supplier of a wide variety of products.

(a) Multiple shop

(b) Mail order Business

(c) Tele-shopping

(d) Departmental store

50. What is the Bill receivable account?

(a) Personal Account

(b) Machinery Account

(c) Real Account

(d) Nominal Account

51. A bill of exchange includes.

(a) An order to pay

(b) A request to pay

(c) A promise to pay

(d) All the above

52. Which bill is drawn and accepted in the same country?

(a) Trade Bill

(b) Foreign Bill

(c) Inland Bill

(d) Accommodation Bill

53. Who draws a bill of exchange?

(a) Creditor

(b) Debtor

(c) Holder

(d) None of the above

54. What is the person known as who draws a bill of exchange

(a) Drawer

(b) Payee

(c) Drawee
(d) None of the above

55. What are the three additional days known as that a drawer gives to the drawee for

payment

(a) Conditional days

(b) Additional days

(c) Days of grace

(d) Days of rebate

56. When the drawee signs the bill, it is considered as

(a) Accepted

(b) Retired

(c) Renewed

(d) Endorsed

57. What kind of acceptance is known as when the bill is accepted without any condition?

(a) Qualified acceptance

(b) Conditional acceptance

(c) Blank acceptance

(d) General acceptance

58. When the bill is noted from the notary public, it is known as?

(a) Noting

(b) Discounting

(c) Accepting

(d) None of the above

59. What is retiring a bill under rebate means?

(a) Making a payment of the bill before the due date

(b) Dishonoring of a bill

(c) Making a payment of the bill after the due date

(d) All of the above

60. The most widely used monetary policy tool among these is.

(a) Open market operations

(b) Issuing of notes

(c) Close market operations

(d) Discount rate

ANSWER KEY
1 c 11 b 21 b 31 d 41 a 51 a

2 c 12 c 22 b 32 b 42 c 52 c

3 b 13 d 23 b 33 b 43 d 53 c

4 d 14 c 24 e 34 b 44 c 54 a

5 c 15 b 25 c 35 d 45 c 55 c

6 b 16 c 26 a 36 d 46 a 56 a

7 b 17 a 27 c 37 d 47 c 57 d

8 d 18 d 28 a 38 a 48 b 58 a

9 d 19 d 29 c 39 a 49 d 59 a

10 a 20 b 30 c 40 c 50 c 60 a

1. Which of the following is a legitimate reason for international investment?

A. Dividends from a foreign subsidiary are tax exempt in the United States.
B. Most governments do not tax foreign corporations.
C. There are possible benefits from international diversification.
D. International investments have less political risk than domestic investments.
2. By definition, currency appreciation occurs when
A. the value of all currencies fall relative to gold.
B. the value of all currencies rise relative to gold.
C. the value of one currency rises relative to another currency.
D. the value of one currency falls relative to another currency.
3. Theory which considers change in exchange rate with fluctuations in inflation rates is classified as
A. liquidated power parity
B. purchasing power parity
C. selling power parity
D. volatile power parity
4. If purchasing power parity were to hold even in the short run, then:
A. real exchange rates should tend to decrease over time.
B. quoted nominal exchange rates should be stable over time.
C. real exchange rates should tend to increase over time.
D. real exchange rates should be stable over time.
5. Given a home country and a foreign country, purchasing power parity suggests that:
A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation
rate
B. the home currency will depreciate if the current home interest rate exceeds the current foreign interest
rate
C. the home currency will depreciate if the current home inflation rate exceeds the current foreign
inflation rate
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest
rate
6. Interest Rate Parity (IRP) implies that:
A. Interest rates should change by an equal amount but in the opposite direction to the difference in
inflation rates between two countries
B. The difference in interest rates in different currencies for securities of similar risk and maturity
should be consistent with the forward rate discount or premium for the foreign currency
C. The interest rates between two countries start in equilibrium, any change in the differential rate of
inflation between the two countries tends to be offset over the longterm by an equal but opposite
change in the spot exchange rate
D. In the long run real interest rate between two countries will be equal
E. Nominal interest rates in each country are equal to the required real rate plus compensation for expected
inflation
7. In equilibrium position, spread between foreign and domestic rate of interest must be equal to spread of
A. domestic rates
B. forward and spot exchange rates
C. forward rate
D. spot rates
8. Rule which states that similar set of goods and services produced in various countries should have equal price is
classified as
A. law of similar mortgage rate
B. law of one type manufacturing
C. law of similar labor rules
 D. law of one price
9. Example of derivative securities includes
A. swap contract
B. option contract
C. futures contract
D. all of above
10. Authority which intervenes directly or indirectly in foreign exchange markets by altering interest rates is
considered as
A. central government
B. centralized stocks
C. central corporations
D. centralized instruments
11. The forward market is especially well-suited to offer hedging protection against
A. translation risk exposure.
B. transactions risk exposure.
C. political risk exposure.
D. taxation.
12. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market. This implies that
most likely
A. this currency has low exchange-rate risk.
B. this currency is gaining strength in relation to the dollar.
C. interest rates are higher in Japan than in the United States.
D. interest rates are declining in Japan.
13. Hedging is used by companies to:
A. Decrease the variability of tax paid
B. Decrease the spread between spot and forward market quotes
C. Increase the variability of expected cash flows
D. Decrease the variability of expected cash flows
E. Increase the variability of tax paid
14. Which of the following is true of foreign exchange markets?
A. The futures market is mainly used by hedgers while the forward market is mainly used for speculating.
B. The futures market and the forward market are mainly used for hedging.
C. The futures market is mainly used by speculators while the forward market is mainly used for
hedging.
D. The futures market and the forward market are mainly used for speculating.
15. Exchange rates
A. are always fixed
B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
C. fluctuate to equate imports and exports
D. fluctuate to equate rates of interest in various countries
16. An arbitrageur in foreign exchange is a person who
A. earns illegal profit by manipulating foreign exchange
B. causes differences in exchange rates in different geographic markets
C. simultaneously buys large amounts of a currency in one market and sell it in another market
D. None of the above
17. A speculator in foreign exchange is a person who
A. buys foreign currency, hoping to profit by selling it a a higher exchange rate at some later date
B. earns illegal profit by manipulation foreign exchange
C. causes differences in exchange rates in different geographic markets
D. None of the above
18. A floating exchange rate
A. is determined by the national governments involved
B. remains extremely stable over long periods of time
C. is determined by the actions of central banks
D. is allowed to vary according to market forces
19. The current system of international finance is a
A. gold standard
B. fixed exchange rate system
C. floating exchange rate system
D. managed float exchange rate system
20. A simultaneous purchase and sale of foreign exchange for two different dates is called
A. currency devalue
 B. currency swap
C. currency valuation
D. currency exchange

Chapter: Unit 1
1. Recently, the UK experienced an annual balance of trade
representing a __________.
A. large surplus (exceeding £100 billion)
B. level of zero
C. small surplus
D. deficit
Answer» D. deficit
discuss
2. An increase in the current account deficit will place
_______ pressure on the home currency value, other
things equal.
A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer» B. downward
discuss
3. The North American Free Trade Agreement (NAFTA)
increased restrictions on:
A. trade between Canada and Mexico.
B. trade between Canada and the U.S.
C. direct foreign investment in Mexico by U.S. firms.
D. none of the above.
Answer» D. none of the above.
discuss
4. The primary component of the current account is the:
A. balance of trade.
B. balance of capital market flows.
C. balance of money market flows.
D. unilateral transfers.
Answer» A. balance of trade.
discuss
5. A General Agreement on Tariffs and Trade (GATT)
accord in 1993 called for:
A. increased trade restrictions outside of North America.
B. lower trade restrictions around the world.
C. uniform environmental standards around the wor
Answer» B. lower trade restrictions around the world.
discuss
6. ______________ is (are) income received by investors on
foreign investments in financial assets (securities).
A. Portfolio income
6. ______________ is (are) income received by investors on
foreign investments in financial assets (securities).
B. Unilateral transfers
C. Direct foreign income
D. Factor income
Answer» D. Factor income
discuss
7. Based on the text, it should be obvious that markets
are__________ in reality, and consequently,
monopolistic advantages _________ be exploited.
A. Perfect; may possibly
B. Perfect; cannot
C. Imperfect; may possibly
D. Imperfect; cannot
Answer» C. Imperfect; may possibly
discuss
8. If countries are highly influential upon each other, the
correlations of their economic growth levels would likely
be __________. A firm would benefit __________ by
diversifying sales among these countries relative to
another set of countries that were not influential upon
each other.
A. high and positive; more
B. high and positive; less
C. close to zero; more
D. close to zero; less
Answer» C. close to zero; more
discuss
9. Which of the following is a reason to consider
international business?
A. economies of scale.
B. exploit monopolistic advantages.
C. diversification.
D. all of the above
Answer» D. all of the above
discuss
10. Assume a U.S. firm initiates direct foreign investment in
the U.K.. If the British pound is expected to appreciate
against the dollar, the dollar value of earnings remitted
to the parent should _______. The parent may request
that the subsidiary _______ in order to benefit from the
expectation about the pound.
A. increase; postpone remitting earnings until the pound strengthens
B. decrease; postpone remitting earnings until the pound strengthens
C. decrease; remit earnings immediately before the pound strengthens
D. increase; remit earnings immediately before the pound strengthens
Answer» A. increase; postpone remitting earnings until the pound strengthens
discuss
11. A country with high unemployment could best increase
its employment by:
encouraging foreign firms to establish subsidiaries that produce the same products local
A.
firms produce.
encouraging foreign firms to establish licensing arrangements for products local firms
B.
produce.
encouraging foreign firms to establish subsidiaries that produce products local firms do not
C.
produce.
D. none of the above would reduce employment.
Answer» C. encouraging foreign firms to establish subsidiaries that produce products local
firms do not produce.
discuss
12. Which of the following is not true regarding host
government attitudes towards foreign direct investment
(FDI)?
Host governments may offer incentives to MNCs in the form of subsidies in certain
A.
circumstances.
Host governments generally perceive FDI as a remedy to eliminate a country's political
B.
problems.
The ability of a host government to attract FDI is dependent on the country's markets and
C.
resources.
D. Some types of FDI will be more attractive to some governments than to others.
Answer» B. Host governments generally perceive FDI as a remedy to eliminate a country's
political problems.
discuss
13. When a firm perceives that a foreign currency is
________, the firm may attempt direct foreign
investment in that country, as the initial outlay should be
relatively _______.
A. overvalued; high
B. overvalued; low
C. undervalued; high
D. undervalued; low
Answer» D. undervalued; low
discuss
14. To enter markets where superior profits are possible, an
MNC should:
A. acquire a competitor that has controlled its local market.
B. establish a subsidiary or acquire a competitor in a new market.
establish a subsidiary in a market where tougher trade restriction will adversely affect the
C.
firm's export volume.
establish subsidiaries in markets whose business cycles differ from those where existing
D.
subsidiaries are based.
Answer» A. acquire a competitor that has controlled its local market.
discuss
15. When economic conditions of two countries are
________, then a firm would _______ its risk by
operating in both countries instead of concentrating just
in one.
A. highly correlated; reduce
B. not highly correlated; reduce
C. not highly correlated; not reduce
D. none of the above
Answer» C. not highly correlated; not reduce
discuss
16. Consider an exporter that sells its accounts receivables
off to another firm that becomes responsible for
obtaining cash from the various importers. This reflects:
A. accounts receivable financing.
B. consignment.
C. factoring.
D. a letter of credit.
Answer» C. factoring.
discuss
17. Consider an exporter that is willing to send goods to the
importer without a guaranteed payment by the bank.
The bank provides a loan to the exporter that is backed
by the value of the exported goods. This reflects:.
A. accounts receivable financing.
B. forfaiting.
C. factoring.
D. a letter of credit.
Answer» A. accounts receivable financing.
discuss
18. A________ provides a summary of freight charges and
conveys title to the merchandise.
A. letter of credit
B. banker's acceptance
C. bill of lading
D. bill of exchange
Answer» C. bill of lading
discuss
19. With_______, the exporter ships the goods to the
importer while still retaining actual title to the
merchandise.
A. a letter of credit arrangement
B. an open account arrangement
C. a draft arrangement
D. a consignment arrangement
Answer» D. a consignment arrangement
discuss
20. A bill of exchange requesting the bank to pay the face
amount upon presentation of documents is a:
A. banker's acceptance.
B. time draft.
C. letter of credit.
D. sight draft.
Answer» D. sight draft.
discuss
21. Countertrade represents foreign trade:
A. restrictions imposed by the government on imports from another country.
B. restrictions imposed by the government on exports sent from the country.
transactions that force the sales of goods of one country to be linked to the purchase or
C.
exchange of goods from the country.
financing provided to an exporter in exchange for goods provided to the creditor by the
D.
exporter.
Answer» C. transactions that force the sales of goods of one country to be linked to the
purchase or exchange of goods from the country.
discuss
22. Which of the following is not a payment method used for
international trade?
A. consignment.
B. open account.
C. factoring.
D. draft.
Answer» C. factoring.
discuss
23. Which of the following is not true regarding letters of
credit?
A. They are issued by banks on behalf of the importer promising to pay the exporter.
A revocable letter of credit can be cancelled or revoked at any time without prior
B.
notification to the beneficiary.
C. They guarantee that the goods shipped are the goods purchas
Answer» C. They guarantee that the goods shipped are the goods purchas
discuss
24. A banker's acceptance is a draft drawn on and accepted
by a(n) __________.
A. bank
B. importer
C. exporter
D. none of the above
Answer» A. bank
discuss
25. A(n) ___________ is an unconditional promise drawn by
one party, instructing the buyer to pay the face amount
upon presentation.
A. draft
B. bill of lading
C. trade acceptance
D. letter of credit
Answer» A. draft
1. Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0
at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the
rate is £0.41 at Bank Y. Given this information, what would be your
gain if you use £1,000,000 and execute locational arbitrage? That is,
how much will you end up with over and above the £1,000,000 you
started with?
A. £24,340
B. £125,000
C. £150,000
D. £12,550
Answer» A. £24,340
discuss (1)
2. Assume the bid rate of an Australian dollar is £0.40 while the ask ra
is £0.42 at Bank Q. Assume the bid rate of an Australian dollar is
£0.415 while the ask rate is £0.419 at Bank V. Given this information
what would be your gain if you use £1,000,000 and execute locationa
arbitrage? That is, how much will you end up with over and above t
£1,000,000 you started with?
A. £10,003
B. £12,063
C. £14,441
D. £0
Answer» D. £0
discuss
3. Arbitrageurs in foreign exchange markets:
A. take advantage of the small inconsistencies that develop between markets.
B. attempt to make profits by outguessing the market.
C. make their profits through the spread between bid and offer rates of exchange.
D. need foreign exchange in order to buy foreign goods.
Answer» A. take advantage of the small inconsistencies that develop between markets.
discuss
4. Covered interest rate parity occurs as the result of:
A. the actions of market-makers.
B. purchasing power parity
C. interest rate arbitrage.
D. stabilising speculation.
Answer» C. interest rate arbitrage.
discuss
5. Given the following interest rates on different currencies, which of t
following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25
percent. Yen 0.5 percent.
The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried
A.
dollars.
B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than eur
The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall
C.
value.
5. Given the following interest rates on different currencies, which of t
following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25
percent. Yen 0.5 percent.
The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a lo
D.
rate of interest.
Answer» B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply
euro.
discuss
6. Which of the following best explains the fact that interest rates on th
euro are lower than those on the pound? Inflationary expectations a
higher in the UK than in the eurozone.
A. British markets are offshore from mainland Europe.
B. Unemployment is higher in the eurozone than in the UK.
C. Bond prices are lower in the UK than in the eurozone.
D. The euro is a weaker currency than sterling.
Answer» A. British markets are offshore from mainland Europe.
discuss
7. The euro is:
A. a currency, the value of which is determined by demand and supply.
B. the currency of EU member countries.
C. a weighted average of the currencies of EU member countries.
D. a currency that is only traded offshore.
Answer» A. a currency, the value of which is determined by demand and supply.
discuss
8. Overshooting models of the exchange rate are an attempt to explain
A. why purchasing power parity plays no role in determining the value of a currency.
B. why exchange rates are so volatile.
C. why the foreign exchange market is never in equilibrium.
D. why forward rates of exchange are not good predictors of future spot rates of exchange.
Answer» B. why exchange rates are so volatile.
discuss
9. Suppose a deposit in New York earns 6 percent a year and a deposit
London earns 4 percent a year. Interest rate parity holds if the
A. U.S. dollar depreciates by 2 percent a year.
B. U.S. dollar appreciates by 2 percent a year.
C. U.K. pound depreciates by 2 percent a year.
D. None of the above answers is correct because interest rate parity requires that the interest
Answer» A. U.S. dollar depreciates by 2 percent a year.
discuss
10. When the value of one currency falls relative to another currency, th
exchange rate for the first currency has
A. revalued.
B. depreciated.
C. appreciat
Answer» B. depreciated.
discuss
11. Under a gold standard, countries should
A. keep the supply of their domestic money constant.
B. keep the supply of their domestic money fixed in proportion to their gold holdings.
11. Under a gold standard, countries should
C. keep the supply of foreign exchange less than their domestic money supply.
D. restrict the demand for foreign goods.
Answer» C. keep the supply of foreign exchange less than their domestic money supply.
discuss
12. Under a fixed exchange standard, if the domestic demand for foreig
exchange increases
A. the central monetary authority must meet the demand out of its reserves.
B. the central monetary authority must increase the supply of domestic money.
C. the fixed exchange standard will breakdown.
D. inflation will increase.
Answer» B. the central monetary authority must increase the supply of domestic money.
discuss
13. The biggest disadvantage of a fixed exchange rate is the
A. increased probability of high inflation.
B. tradeoff between supporting the exchange rate and adjusting the trade balance.
C. tradeoff between supporting the exchange rate and maintaining full employment.
D. increased probability of a trade deficit.
Answer» A. increased probability of high inflation.
discuss
14. The effect of a depreciation of the domestic currency on the trade
balance is likely to
A. increase it in the short and long runs.
B. decrease it in the short run and increase it in the long run.
C. decrease it in the short and long runs.
D. increase it in the short run and decrease it in the long run.
Answer» B. decrease it in the short run and increase it in the long run.
discuss
15. Which of the following institutions is the most important participan
foreign currency markets?
A. A retail customer
B. A commercial bank
C. A foreign exchange broker
D. A central bank
Answer» D. A central bank
discuss
16. An increase in the U.S. demand for the euro
A. causes a rise in the dollar exchange rate.
B. causes the euro to appreciate.
C. causes the dollar to depreciate.
D. causes Euro Area goods to be relatively more expensive.
Answer» A. causes a rise in the dollar exchange rate.
discuss
17. Which of the following would NOT be a cause for an increased
American demand for the euros?
A. The United States having lower interest rates than the Euro Area
B. Increased American demand for Euro Area goods
C. The expectation by speculators that the value of the euro is edging up
D. More economic expansion in the United States
17. Which of the following would NOT be a cause for an increased
American demand for the euros?
Answer» B. Increased American demand for Euro Area goods
discuss
18. Which of the following is NOT one of the determinants of the gains o
adopting a single currency?
A. A well-synchronized business cycle involving all member countries
B. The possibility of factors of production to freely move across borders
The willingness and ability of member countries to design policies to address regional imbalances that may
C.
develop
D. Widening the common market by allowing other countries to join
Answer» A. A well-synchronized business cycle involving all member countries
discuss
19. If more European and Japanese firms want to build factories and
expand their offshore investments in the United States, the supply of
U.S. dollars on foreign exchange markets will increase as a result of
investment activity.
A. True
B. False
C. all
D. none
Answer» A. True
discuss
20. Which of the following forecasting techniques would best represent
use of today's forward exchange rate to forecast the future exchange
rate?
A. fundamental forecasting.
B. technical forecasting.
C. market-based forecasting.
D. mixed forecasting.
Answer» B. technical forecasting.
discuss
21. If a particular currency is consistently declining substantially over
time, then a market- based forecast will usually have:
A. underestimated the future exchange rates over time.
B. overestimated the future exchange rates over time.
C. forecasted future exchange rates accurately.
forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or
D.
overestimating.
Answer» B. overestimated the future exchange rates over time.
discuss
22. Which of the following is true according to the text?
A. Forecasts in recent years have been very accurate.
Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a fo
B.
bias.
C. Forecasting errors are smaller when focused on longer term periods.
D. None of the above.
Answer» D. None of the above.
discuss
23. Which of the following is not a forecasting technique mentioned in y
text?
A. accounting-based forecasting.
B. fundamental forecasting.
C. technical forecasting.
D. market-based forecasting.
Answer» A. accounting-based forecasting.
discuss
24. Which of the following is not a method of forecasting exchange rate
volatility?
A. using the absolute forecast error as a percentage of the realized value.
B. using the volatility of historical exchange rate movements as a forecast for the future.
C. using a time series of volatility patterns in previous periods.
D. deriving the exchange rate's implied standard deviation from the currency option pricing model.
Answer» A. using the absolute forecast error as a percentage of the realized value.
discuss
25. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol i
equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:
A. about .3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about .3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer» C. about .3137 Canadian dollars.

Chapter: Unit 3
1. Kalons ltd. is a UK-based MNC that frequently imports raw
materials from Canada. Kalons is typically invoiced for these goods
in Canadian dollars and is concerned that the Canadian dollar will
appreciate in the near future. Which of the following is not an
appropriate hedging technique under these circumstances?
A. purchase Canadian dollars forward.
B. purchase Canadian dollar futures contracts.
C. purchase Canadian dollar put options.
D. purchase Canadian dollar call options.
Answer» C. purchase Canadian dollar put options.
discuss
2. Which of the following is the most likely strategy for a UK firm that
will be receiving Swiss francs in the future and desires to avoid
exchange rate risk (assume the firm has no offsetting position in
francs)?
A. purchase a call option on francs.
B. sell a futures contract on francs.
C. obtain a forward contract to purchase francs forwa
Answer» B. sell a futures contract on francs.
discuss
3. Which of the following is true?
A. Most forward contracts between firms and banks are for speculative purposes.
3. Which of the following is true?
B. Most future contracts represent a conservative approach by firms to hedge foreign trade.
C. The forward contracts offered by banks have maturities for only four possible dates in the future.
D. none of the above
Answer» D. none of the above
discuss
4. European currency options can be exercised _______; American
currency options can be exercised _______.
A. any time up to the expiration date; any time up to the expiration date
B. any time up to the expiration date; only on the expiration date
C. only on the expiration date; only on the expiration date
D. only on the expiration date; any time up to the expiration date
Answer» D. only on the expiration date; any time up to the expiration date
discuss
5. A UK corporation has purchased currency call options to hedge a
70,000 dollar payable. The premium is £0.015 and the exercise price
of the option is £0.54. If the spot rate at the time of maturity is £0.59
what is the total amount paid by the corporation if it acts rationally?
A. £36,750
B. £1,050
C. £37,800
D. £38,850
Answer» D. £38,850
discuss
6. Conditional currency options are:
A. options that do not require premiums.
B. options where the premiums are canceled if a trigger level is reached.
C. options that allow the buyer to decide what currency the option will be settled in.
D. none of the above
Answer» B. options where the premiums are canceled if a trigger level is reached.
discuss
7. Which of the following are true regarding the options markets?
A. Hedgers and speculators both attempt to lower risk.
B. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C. Hedgers and speculators are both necessary in order for the market to be liqu
Answer» C. Hedgers and speculators are both necessary in order for the market to be liqu
discuss
8. The premium of a currency put option will increase if:
A. the volatility of the underlying asset goes up.
B. the time to maturity goes up.
C. the spot rate declines.
D. none of the above
Answer» D. none of the above
discuss
9. Which of the following is true of options?
A. The writer decides whether the option will be exercised.
B. The writer pays the buyer the option premium.
C. The buyer decides if the option will be exercis
Answer» C. The buyer decides if the option will be exercis
discuss
10. The purchase of a currency put option would be appropriate for
which of the following?
A. Investors who expect to buy a foreign bond in one month.
B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C. Corporations who expect to collect on a foreign account receivable in one month.
D. All of the above
Answer» B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
discuss
11. The spot rate for the Singapore dollar is £0.320. The 30-day forward
rate is £0.325. The forward rate contains an annualized __________
of ___________%.
A. discount; -18.75
B. premium; 18.75
C. discount; -18.46
D. premium; 18.46
Answer» B. premium; 18.75
discuss
12. Translation exposure reflects:
A. the exposure of a firm's ongoing international transactions to exchange rate fluctuations.
B. the exposure of a firm's local currency value to transactions between foreign exchange traders.
C. the exposure of a firm's financial statements to exchange rate fluctuations.
D. the exposure of a firm's cash flows to exchange rate fluctuations.
Answer» C. the exposure of a firm's financial statements to exchange rate fluctuations.
discuss
13. Diz ltd. is a UK-based MNC with net cash inflows of euros and net
cash inflows of Swiss francs. These two currencies are highly
correlated in their movements against the dollar. Yanta ltd is a UK-
based MNC that has the same level of net cash flows in these
currencies as Diz ltd except that its euros represent net cash outflow
Which firm has a higher exposure to exchange rate risk?
A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer» A. Diz ltd
discuss
14. Which of the following operations benefits from depreciation of the
firm's local currency?
A. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
B. purchasing foreign supplies.
investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local
C.
currency.
D. A and B
Answer» C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the loc
currency.
discuss
15. Magent ltd. is a UK company that has exposure to the Swiss franc
(SF) and Danish kroner (DK). It has net inflows of SF 200 million
and net outflows of DK 500 million. The present exchange rate of th
SF is about £0.22 while the present exchange rate of the DK is £0.05
Magent ltd. has not hedged these positions. The SF and DK are
highly correlated in their movements against the pound. If the poun
weakens, then Magent ltd. will:
A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
B. benefit, because the pound value of its DK position exceeds the pound value of its SF position.
C. be adversely affected, because the pound value of its SF position exceeds the pound value of its DK position
D. be adversely affected, because the pound value of its DK position exceeds the pound value of its SF position
Answer» A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
discuss
16. Subsidiary A of Mega plc has net inflows in Australian dollars of
A$1,000,000, while Subsidiary B has net outflows in Australian
dollars of A$1,500,000. The expected exchange rate of the Australian
dollar is £0.30. What is the net inflow or outflow as measured in
pounds?
A. £150,000 outflow
B. £150,000 inflow
C. £1,666,000 inflow
D. £1,666,000 outflow
Answer» A. £150,000 outflow
discuss
17. If an MNC expects cash inflows of equal amounts in two currencies,
and the two currencies are ___________ correlated, the MNC's
transaction exposure is relatively ___________.
A. negatively; high
B. negatively; low
C. positively; low
D. none of the above
Answer» B. negatively; low
discuss
18. The maximum one-day loss computed for the value-at-risk (VAR)
method, does not depend on:
A. the expected percentage change in the currency for the next day.
B. the standard deviation of the daily percentage changes in the currency over a previous period.
C. the current level of interest rates.
D. the confidence level used.
Answer» C. the current level of interest rates.
discuss
19. Volusia, plc is a UK-based exporting firm that expects to receive
payments denominated in both euros and Canadian dollars in one
month. Based on today's spot rates, the pound value of the funds to
be received is estimated at £500,000 for the euros and £300,000 for
the Canadian dollars. Based on data for the last fifty months, Volusi
estimates the standard deviation of monthly percentage changes to b
8 percent for the euro and 3 percent for the Canadian dollar. The
correlation coefficient between the euro and the Canadian dollar is
0.30. What is the portfolio standard deviation?
A. 3.00%.
B. 5.44%.
C. 17.98%.
D. none of the above
Answer» B. 5.44%.
discuss
20. The __________ the percentage of an MNC's business conducted by
its foreign subsidiaries, the _________ the percentage of a given
financial statement item that is susceptible to translation exposure.
A. greater; smaller
B. smaller; greater
C. greater; greater
D. none of the above
Answer» C. greater; greater
discuss
21. Consider an MNC that is exposed to the Taiwan dollar (TWD) and
the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan
dollars and 75% are pounds. The standard deviation of exchange
movements is 7% for Taiwan dollars and 5% forpounds. The
correlation coefficient between movements in the value of the Taiwa
dollar and the pound is .7. Based on this information, the standard
deviation of this two-currency portfolio is approximately:
A. 5.13%.
B. 2.63%.
C. 4.33%.
D. 5.55%
Answer» A. 5.13%.
discuss
22. Assume zero transaction costs. If the 90-day forward rate of the eur
is an accurate estimate of the spot rate 90 days from now, then the
real cost of hedging payables will be:
A. positive.
B. negative.
C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D. zero.
Answer» D. zero.
discuss
23. An example of cross-hedging is:
find two currencies that are highly positively correlated; match the payables of the one currency to the
A.
receivables of the other currency.
B. use the forward market to sell forward whatever currencies you will receive.
C. use the forward market to buy forward whatever currencies you will receive.
D. B and C
Answer» A. find two currencies that are highly positively correlated; match the payables of the one currency to t
receivables of the other currency.
discuss
24. The real cost of hedging payables with a forward contract equals:
A. the nominal cost of hedging minus the nominal cost of not hedging.
B. the nominal cost of not hedging minus the nominal cost of hedging.
C. the nominal cost of hedging divided by the nominal cost of not hedging.
D. the nominal cost of not hedging divided by the nominal cost of hedging.
Answer» A. the nominal cost of hedging minus the nominal cost of not hedging.
discuss
25. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is
certain that the euro will depreciate substantially over time.
Assuming that the firm is correct, the ideal strategy is to:
A. sell euros forward.
B. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer» A. sell euros forward.

1. If a UK parent is setting up a French subsidiary, and funds from the

subsidiary will be periodically sent to the parent, the ideal situation
from the parent's perspective is a ____ after the subsidiary is
established.
A. strengthening euro
B. stable euro
C. weak euro
D. B and C are both ideal.
Answer» A. strengthening euro
discuss
2. Assume the parent of a UK-based MNC plans to completely finance
the establishment of its US subsidiary with existing funds from
retained earnings in UK operations. According to the text, the
discount rate used in the capital budgeting analysis on this project
should be most affected by:
A. the cost of borrowing funds in the U.K.
B. the cost of borrowing funds in the U.S.
C. the parent's cost of capital.
D. A and B
Answer» C. the parent's cost of capital.
discuss
3. A firm considers an exporting project and will invoice the exports in
pounds. The expected cash flows in pounds would be more difficult
the currency of the foreign country is ________.
A. fixed
B. volatile
C. stable
D. none of the above, as the firm is not exposed
Answer» B. volatile
discuss
4. Other things being equal, firms from a particular home country will
engage in more international acquisitions if they expect foreign
currencies to _______ against their home currency, and if their cost
of capital is relatively _______.
A. appreciate; low
B. appreciate; high
C. depreciate; high
D. depreciate; low
Answer» A. appreciate; low
discuss
5. The impact of blocked funds on the net present value of a foreign
project will be greater if interest rates are _______ in the host
country and there are _______ investment opportunities in the host
country.
A. very high; limited
B. very low; limited
C. very low; numerous.
D. very high; numerous
Answer» B. very low; limited
discuss
6. A French-based MNC has just established a subsidiary in Algeria.
Shortly after the plant was built, the MNC determines that its
exchange rate forecasts, which had previously indicated a slight
appreciation in the Algerian dinar were probably false. Instead of a
slight appreciation, the MNC now expects that the dinar will
depreciate substantially due to political turmoil in Algeria. This new
development would likely cause the MNC to __________ its estimate
of the previously computed net present value.
A. lower
B. increase
C. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
Answer» A. lower
discuss
7. Assume that Baps Corporation is considering the establishment of a
subsidiary in Norway. The initial investment required by the parent
is $5,000,000. If the project is undertaken, Baps would terminate the
project after four years. Baps' cost of capital is 13%, and the projec
is of the same risk as Baps' existing projects. All cash flows generate
from the project will be remitted to the parent at the end of each
year. Listed below are the estimated cash flows the Norwegian
subsidiary will generate over the project's lifetime in Norwegian
kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK 10,000,000 NOK
15,000,000 NOK 17,000,000 NOK 20,000,000 The current exchange
rate of the Norwegian kroner is $.135. Baps' exchange rate forecast
for the Norwegian kroner over the project's lifetime is listed below:
Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 Baps is also
uncertain regarding the cost of capital. Recently, Norway has been
involved in some political turmoil. What is the net
A. -$17,602.62.
B. $8,000,000.
C. $1,048,829.
D. $645,147.
Answer» D. $645,147.
discuss
8. When a foreign subsidiary is not wholly owned by the parent and a
foreign project is partially
A. financed with retained earnings of the parent and of the subsidiary, then:
B. the parent's perspective should be used to evaluate a foreign project.
C. the subsidiary's perspective should be used to evaluate a foreign project.
D. the foreign project should enhance the value of both the parent and the subsidiary.
Answer» C. the subsidiary's perspective should be used to evaluate a foreign project.
discuss
9. An international project's NPV is _________ related to the size of th
initial investment and _________ related to the project's required
rate of return.
A. positively; positively
B. positive; negatively
C. negatively; positively
D. negatively; negatively
Answer» D. negatively; negatively
discuss
10. A foreign project generates a negative cash flow in year 1 and
positive cash flows in years 2 through 5. The NPV for this project w
be higher if the foreign currency _________ in year 1 and _________
in years 2 though 5.
A. depreciates; depreciates
B. appreciates; appreciates
C. depreciates; appreciates
D. appreciates; depreciates
10. A foreign project generates a negative cash flow in year 1 and
positive cash flows in years 2 through 5. The NPV for this project w
be higher if the foreign currency _________ in year 1 and _________
in years 2 though 5.
Answer» C. depreciates; appreciates
discuss
11. If an MNC sells a product in a foreign country and imports partially
manufactured components needed for production to that country
from the U.S., then the local economy's inflation will have:
A. a more pronounced impact on revenues than on costs.
B. a less pronounced impact on revenues than on costs.
C. the same impact on revenues as on costs.
D. none of the above
Answer» A. a more pronounced impact on revenues than on costs.
discuss
12. Which of the following is not true regarding a target's previous cash
flows?
They may serve as an initial base from which future cash flows may be estimated after accounting for other
A.
factors.
It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be
B.
generated from a new foreign subsidiary.
C. They are always good indicators of future cash flows.
D. All of the above are true.
Answer» C. They are always good indicators of future cash flows.
discuss
13. Which of the following would probably not cause the stock price of a
foreign target to decrease?
A. Its expected cash flows decline.
B. General stock market conditions in the foreign country are deteriorating.
C. Investors anticipate that the target will be acquir
Answer» C. Investors anticipate that the target will be acquir
discuss
14. A previously undertaken project in a foreign country may no longer
be feasible because:
A. the MNC is unable to raise sufficient funds in order to undertake the project.
B. the MNC's cost of capital has decreased.
C. the host government has increased its tax rates substantially.
D. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Answer» C. the host government has increased its tax rates substantially.
discuss
15. Other things being equal, a foreign subsidiary in China would more
likely be divested by the U.S. parent if new information caused the
parent to suddenly anticipate that:
A. the Chinese yuan would depreciate in the future.
B. the Chinese yuan would appreciate in the future.
C. the Chinese yuan would remain somewhat stable in the future.
D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Answer» A. the Chinese yuan would depreciate in the future.
discuss
16. A macro-assessment of country risk:
A. is adjusted for the particular business of the firm involved.
B. excludes all aspects relevant to a particular firm or project.
C. A and B
D. none of the above
Answer» B. excludes all aspects relevant to a particular firm or project.
discuss
17. The checklist approach:
A. requires several inspections of the country being evaluated.
B. requires the use of discriminant analysis to assess country risk.
C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D. involves the collection of independent opinions on country risk.
Answer» C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
discuss
18. Insurance purchased to cover the risk of expropriation __________,
and will typically cover __________.
A. will be the same for all firms; only a portion of the firm's total exposure.
B. will be the same for all firms; all of the firm's total exposure.
C. will be dependent on the firm's risk; all of the firm's total exposure.
D. will be dependent on the firm's risk; only a portion of the firm's total exposure.
Answer» D. will be dependent on the firm's risk; only a portion of the firm's total exposure.
discuss
19. If a foreign country follows the "Purchase Homemade Products"
philosophy, the least effective strategy would be for a UK firm to:
A. use a licensing arrangement with a local firm in that country.
B. enter into a joint venture in that country.
C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
D. develop a subsidiary (under the US name) that manufactures products in that
Answer» C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
discuss
20. A firm may incorporate a country risk rating into the capital
budgeting analysis by:
adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark
A.
level.
B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
C. A and B
D. none of the above
Answer» B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
discuss
21. ______________ is(are) not a form of political risk.
A. Exchange rate movements
B. Attitude of consumers in the host country
C. Actions of the host government
D. Blockage of fund transfers
Answer» A. Exchange rate movements
discuss
22. When quantifying country risk:
A. weights should be equally allocated among factors.
22. When quantifying country risk:
B. weights should be assigned to the political and financial factors according to their perceived importance.
it is not generally necessary to construct separate ratings for political and financial risk since these will be
C.
equally weighed in the final analysis.
D. the derived factors will be identical for all MNCs conducting business in that country.
Answer» B. weights should be assigned to the political and financial factors according to their perceived
importance.
discuss
23. An argument for MNCs to have a debt-intensive capital structure is
A. they are well diversified.
B. foreign government tax rules may change over time.
C. exposure to exchange rate fluctuations.
D. exposure to fund blockage.
Answer» A. they are well diversified.
discuss
24. The capital asset pricing theory is based on the premise that:
A. only unsystematic variability in cash flows is relevant.
B. only systematic variability in cash flows is relevant.
C. both systematic and unsystematic variability in cash flows are relevant.
D. neither systematic nor unsystematic variability in cash flows is relevant.
Answer» B. only systematic variability in cash flows is relevant.
discuss
25. One argument for why subsidiaries should be wholly-owned by the
parent is that:
A. the potential conflict of interests between the MNC's managers and shareholders is avoided.
the potential conflict of interests between the MNC's majority shareholders and minority shareholders is
B.
avoided.
C. the potential conflict of interests between the MNC's existing creditors is avoid
Answer» B. the potential conflict of interests between the MNC's majority shareholders and minority shareholde
is avoided.
1. Which of the following is a legitimate reason for international

investment?
A. Dividends from a foreign subsidiary are tax exempt in the United States.
B. Most governments do not tax foreign corporations.
C. There are possible benefits from international diversification.
D. International investments have less political risk than domestic investments.
Answer» C. There are possible benefits from international diversification.
discuss
2. Theory which considers change in exchange rate with fluctuations in
inflation rates is classified as
A. liquidated power parity
B. purchasing power parity
C. selling power parity
D. volatile power parity
Answer» B. purchasing power parity
discuss
3. If purchasing power parity were to hold even in the short run, then:
A. real exchange rates should tend to decrease over time.
B. quoted nominal exchange rates should be stable over time.
C. real exchange rates should tend to increase over time.
3. If purchasing power parity were to hold even in the short run, then:
D. real exchange rates should be stable over time.
Answer» D. real exchange rates should be stable over time.
discuss
4. Given a home country and a foreign country, purchasing power
parity suggests that:
A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate
B. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate
C. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate
Answer» C. the home currency will depreciate if the current home inflation rate exceeds the current foreign
inflation rate
discuss
5. Interest Rate Parity (IRP) implies that:
Interest rates should change by an equal amount but in the opposite direction to the difference in inflation ra
A.
between two countries
The difference in interest rates in different currencies for securities of similar risk and maturity should be
B.
consistent with the forward rate discount or premium for the foreign currency
The interest rates between two countries start in equilibrium, any change in the differential rate of inflation
C. between the two countries tends to be offset over the longterm by an equal but opposite change in the spot
exchange rate
D. In the long run real interest rate between two countries will be equal
Answer» B. The difference in interest rates in different currencies for securities of similar risk and maturity shou
be consistent with the forward rate discount or premium for the foreign currency
discuss
6. In equilibrium position, spread between foreign and domestic rate o
interest must be equal to spread of
A. domestic rates
B. forward and spot exchange rates
C. forward rate
D. spot rates
Answer» B. forward and spot exchange rates
discuss
7. Rule which states that similar set of goods and services produced in
various countries should have equal price is classified as
A. law of similar mortgage rate
B. law of one type manufacturing
C. law of similar labor rules
D. law of one price
Answer» D. law of one price
discuss
8. Example of derivative securities includes
A. swap contract
B. option contract
C. futures contract
D. all of above
Answer» D. all of above
discuss
9. Authority which intervenes directly or indirectly in foreign exchang
markets by altering interest rates is considered as
A. central government
B. centralized stocks
C. central corporations
D. centralized instruments
Answer» A. central government
discuss
10. The forward market is especially well-suited to offer hedging
protection against
A. translation risk exposure.
B. transactions risk exposure.
C. political risk exposure.
D. taxation.
Answer» B. transactions risk exposure.
discuss
11. Suppose that the Japanese yen is selling at a forward discount in the
forward-exchange market. This implies that most likely
A. this currency has low exchange-rate risk.
B. this currency is gaining strength in relation to the dollar.
C. interest rates are higher in Japan than in the United States.
D. interest rates are declining in Japan.
Answer» C. interest rates are higher in Japan than in the United States.
discuss
12. Hedging is used by companies to:
A. Decrease the variability of tax paid
B. Decrease the spread between spot and forward market quotes
C. Increase the variability of expected cash flows
D. Decrease the variability of expected cash flows
Answer» D. Decrease the variability of expected cash flows
discuss
13. Which of the following is true of foreign exchange markets?
A. The futures market is mainly used by hedgers while the forward market is mainly used for speculating.
B. The futures market and the forward market are mainly used for hedging.
C. The futures market is mainly used by speculators while the forward market is mainly used for hedging.
D. The futures market and the forward market are mainly used for speculating.
Answer» C. The futures market is mainly used by speculators while the forward market is mainly used for
hedging.
discuss
14. Exchange rates
A. are always fixed
B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
C. fluctuate to equate imports and exports
D. fluctuate to equate rates of interest in various countries
Answer» B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
discuss
15. An arbitrageur in foreign exchange is a person who
A. earns illegal profit by manipulating foreign exchange
B. causes differences in exchange rates in different geographic markets
C. simultaneously buys large amounts of a currency in one market and sell it in another market
15. An arbitrageur in foreign exchange is a person who
D. None of the above
Answer» C. simultaneously buys large amounts of a currency in one market and sell it in another market
discuss
16. A speculator in foreign exchange is a person who
A. buys foreign currency, hoping to profit by selling it a a higher exchange rate at some later date
B. earns illegal profit by manipulation foreign exchange
C. causes differences in exchange rates in different geographic markets
D. None of the above
Answer» A. buys foreign currency, hoping to profit by selling it a a higher exchange rate at some later date
discuss
17. A floating exchange rate
A. is determined by the national governments involved
B. remains extremely stable over long periods of time
C. is determined by the actions of central banks
D. is allowed to vary according to market forces
Answer» D. is allowed to vary according to market forces
discuss
18. The current system of international finance is a
A. gold standard
B. fixed exchange rate system
C. floating exchange rate system
D. managed float exchange rate system
Answer» D. managed float exchange rate system
discuss
19. A simultaneous purchase and sale of foreign exchange for two
different dates is called
A. currency devalue
B. currency swap
C. currency valuation
D. currency exchange
Answer» B. currency swap
discuss
20. Investment can be defined.
A. Person’s dedication to purchasing a house or flat
B. Use of capital on assets to receive returns
C. Usage of money on a production process of products and services
D. Net additions made to the nation’s capital stocks
Answer» B. Use of capital on assets to receive returns
discuss
21. The concept of Financial management is.
A. Profit maximization
B. All features of obtaining and using financial resources for company operations
C. Organization of funds
D. Effective Management of every company
Answer» B. All features of obtaining and using financial resources for company operations
discuss
22. What is the primary goal of financial management?
A. To minimise the risk
22. What is the primary goal of financial management?
B. To maximise the owner’s wealth
C. To maximise the return
D. To raise profit
Answer» B. To maximise the owner’s wealth
discuss
23. The finance manager is accountable for.
A. Earning capital assets of the company
B. Effective management of a fund
C. Arrangement of financial resources
D. Proper utilisation of funds
Answer» C. Arrangement of financial resources
discuss
24. The market value of a share is responsible for.
A. The investment market
B. The government
C. Shareholders
D. The respective companies
Answer» A. The investment market
discuss
25. The capital budget is associated with.
A. Long terms and short terms assets
B. Fixed assets
C. Long terms assets
D. Short term assets
Answer» C. Long terms assets
discuss
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